10QSB 1 sf10q33105.txt SANTA FE FORM 10-QSB 3-31-05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 [ ] Transition Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from ________ to _________. Commission file number 0-6877 SANTA FE FINANCIAL CORPORATION ------------------------------ (Exact Name of Small Business Issuer as Specified in Its Charter) Nevada 95-2452529 ------------------------------- ------------------ (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 820 Moraga Drive Los Angeles, CA 90049 --------------------------------------- ------------------ (Address of Principal Executive Offices) (Zip Code) (310) 889-2500 --------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes (x) No ( ) State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date: 1,178,210 shares of issuer's $.10 Par Value Common Stock were outstanding as of May 11, 2005. Transitional Small Business Disclosure Format (check one): Yes ( ) No (X) INDEX SANTA FE FINANCIAL CORPORATION PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheet - March 31, 2005 (Unaudited) 3 Consolidated Statements of Operations (Unaudited) - Three Months ended March 31, 2005 and March 31, 2004 4 Consolidated Statements of Operations (Unaudited) - Nine Months ended March 31, 2005 and March 31, 2004 5 Consolidated Statements of Cash Flows (Unaudited) - Nine Months ended March 31, 2005 and March 31, 2004 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Controls and Procedures 23 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Shareholders 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25 -2- PART I FINANCIAL INFORMATION Item 1. Financial Statements Santa Fe Financial Corporation Consolidated Balance Sheet (Unaudited) As of March 31, 2005 ----------- ASSETS Cash and cash equivalents $ 715,000 Investment in marketable securities 7,701,000 Investment in Justice Investors 7,309,000 Rental property, net 4,632,000 Other investments 565,000 Other assets 1,200,000 ----------- Total assets $ 22,122,000 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Obligations for securities sold 844,000 Mortgage notes payable 2,289,000 Accounts payable and accrued expenses 278,000 ----------- Total liabilities 3,411,000 ----------- Minority interest 5,473,000 ----------- Commitments and contingencies Shareholders' equity 6% Cumulative, convertible, voting preferred stock par value $.10 per share Authorized shares - 1,000,000 Issued and outstanding - 63,600 Liquidation preference of $858,600 6,000 Common stock - par value $.10 per share Authorized - 2,000,000 Issued 1,276,038 and outstanding 1,178,210 128,000 Additional paid-in capital 8,808,000 Retained earnings 5,247,000 Treasury stock, at cost, 97,828 shares (951,000) ----------- Total shareholders' equity 13,238,000 ----------- Total liabilities & shareholders' equity $ 22,122,000 =========== See accompanying notes to consolidated financial statements. -3- Santa Fe Financial Corporation Consolidated Statements of Operations (Unaudited) For the three months ended March 31, 2005 2004 ---------- ---------- Real estate operations: Rental income $ 113,000 $ 98,000 Property operating expense (34,000) (52,000) Mortgage interest expense (50,000) (52,000) Depreciation expense (19,000) (18,000) ---------- ---------- Income(loss) from real estate operations 10,000 (24,000) ---------- ---------- General and administrative expenses (193,000) (216,000) ---------- ---------- Equity in net income(loss) of Justice Investors (471,000) 152,000 --------- ---------- Other income(loss): Net gains(losses) on marketable securities (3,257,000) 1,438,000 Dividend and interest income 70,000 89,000 Margin interest and trading expenses (195,000) (403,000) Other income, net 18,000 16,000 ---------- ---------- Total other income(loss) (3,364,000) 1,140,000 ---------- ---------- Income(loss) before income taxes and minority interest (4,018,000) 1,052,000 Income tax benefit(expense) 1,607,000 (421,000) ---------- ---------- Income(loss) before minority interest (2,411,000) 631,000 Minority interest benefit(expense), net of tax 534,000 (106,000) ---------- ---------- Net income(loss) $(1,877,000) $ 525,000 Preferred stock dividend (13,000) (13,000) ---------- ---------- Income(loss) available to common shareholders $(1,890,000) $ 512,000 ========== ========== Basic income(loss) per share $ (1.60) $ 0.43 ========== ========== Weighted average number of shares outstanding 1,178,210 1,178,210 ========== ========== See accompanying notes to consolidated financial statements. -4- Santa Fe Financial Corporation Consolidated Statements of Operations (Unaudited) For the nine months ended March 31, 2005 2004 ---------- ---------- Real estate operations: Rental income $ 326,000 $ 293,000 Property operating expense (114,000) (149,000) Mortgage interest expense (151,000) (152,000) Depreciation expense (59,000) (55,000) ---------- ---------- Income(loss) from real estate operations 2,000 (63,000) ---------- ---------- General and administrative expenses (650,000) (670,000) ---------- ---------- Equity in net income of Justice Investors (674,000) 672,000 --------- ---------- Other income (loss): Net gains(losses) on marketable securities (2,725,000) 3,965,000 Impairment loss on other investments (84,000) - Dividend and interest income 308,000 241,000 Margin interest and trading expenses (462,000) (873,000) Other income, net 112,000 43,000 ---------- ---------- Total other income(loss) (2,851,000) 3,376,000 ---------- ---------- Income(loss) before income taxes and minority interest (4,173,000) 3,315,000 Income tax benefit(expense) 1,669,000 (1,326,000) ---------- ---------- Income(loss) before minority interest (2,504,000) 1,989,000 Minority interest benefit(expense), net of tax 564,000 (437,000) ---------- ---------- Net income(loss) $(1,940,000) $1,552,000 Preferred stock dividend (39,000) (39,000) ---------- ---------- Income(loss) available to common shareholders $(1,979,000) $1,513,000 ========== ========== Basic income(loss) per share $ (1.68) $ 1.28 ========== ========== Weighted average number of shares outstanding 1,178,210 1,178,210 ========== ========== See accompanying notes to consolidated financial statements. -5- Santa Fe Financial Corporation Consolidated Statements of Cash Flows (Unaudited) For the nine months ended March 31, 2005 2004 ---------- ---------- Cash flows from operating activities: Net income(loss) $(1,940,000) $ 1,552,000 Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities: Equity in net (income)loss of Justice Investors 674,000 (672,000) Net unrealized losses(gains) on marketable securities 2,976,000 (320,000) Impairment of other investments 84,000 - Minority interest (benefit)expense (564,000) 437,000 Depreciation expense 59,000 55,000 Changes in operating assets and liabilities: Investment in marketable securities 16,083,000 (4,363,000) Other assets (544,000) 1,118,000 Accounts payable and accrued expenses (965,000) (394,000) Due to securities broker (10,202,000) 1,855,000 Obligations for securities sold (5,069,000) 237,000 ---------- ---------- Net cash provided by (used in) operating activities 592,000 (495,000) ---------- ---------- Cash flows from investing activities: Cash distributions from Justice Investors - 874,000 ---------- ---------- Net cash provided by investing activities - 874,000 ---------- ---------- Cash flows from financing activities: Principal payments on mortgage note payable (23,000) (21,000) Dividends paid to preferred shareholders (39,000) (39,000) Dividends paid to minority shareholders - (171,000) ---------- ---------- Net cash used in financing activities (62,000) (231,000) ---------- ---------- Net increase in cash and cash equivalents 530,000 148,000 Cash and cash equivalents at beginning of period 185,000 121,000 ---------- ---------- Cash and cash equivalents at end of period $ 715,000 $ 269,000 ========== ========== See accompanying notes to consolidated financial statements. -6- SANTA FE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Significant Accounting Policies --------------------------------------------------------- The consolidated financial statements included herein have been prepared by Santa Fe Financial Corporation ("Santa Fe" or the "Company"), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, the consolidated financial statements reflect, in the opinion of management, all adjustments (which included only normal recurring adjustments) necessary to state fairly the financial position and results of operations as of and for the periods indicated. The Company's operations primarily consist of managing a hotel property through the interest of its 68.8%-owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), in Justice Investors and its rental properties. The Company also derives income from the investment of its cash and securities assets. On December 31, 1997, the Company acquired a controlling 55.4% interest in Intergroup Woodland Village, Inc. ("Woodland Village") from a related party, The InterGroup Corporation ("InterGroup"), which controls approximately 76.5% of the voting stock of the Company. Woodland Village's major asset is a 27- unit apartment complex located in Los Angeles, California. The Company also owns a two-unit apartment building in Los Angeles, California. Earnings Per Share Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. The Company's only potentially dilutive common shares are the 6% cumulative, convertible, voting preferred stock. As of March 31, 2005 and 2004, the conversion price is above the market value of the Company's common stock, consequently, the preferred stock is not considered dilutive. Therefore, basic and diluted earnings per share for the nine months ended March 31, 2005 and 2004 are the same. It is suggested that these financial statements be read in conjunction with the audited financial statements and the notes therein included in the Company's Form 10-KSB for the year ended June 30, 2004. The results of operations for the three and nine months ended March 31, 2005 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2005. -7- 2. Investment in Justice Investors ------------------------------- The Company's subsidiary, Portsmouth, has a 49.8% interest in Justice Investors, a California limited partnership ("Justice" or the "Partnership"). Portsmouth also serves as one of the two general partners of Justice. The other general partner, Evon Corporation ("Evon"), serves as the managing general partner. Justice owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California, commonly known as the Holiday Inn Select Downtown & Spa (the "Hotel"). The Company's investment in Justice is recorded on the equity basis. Historically, Justice's most significant income source was a lease between the Partnership and Felcor Lodging Trust, Inc. ("Felcor") for the hotel portion of the property. Pursuant to a Settlement Agreement entered into on May 3, 2004, Felcor agreed to terminate its lease and surrender possession of the Hotel to Justice, on June 30, 2004. Effective July 1, 2004, Justice became the owner- operator of the Hotel, with the assistance of a Management Agreement with Dow Hotel Company, LLC. ("Dow") to perform the day-to day management functions of the Hotel. The Partnership also derives income from the lease of the garage portion of the property to Evon and from a lease on the lobby level of the Hotel to Tru Spa. The Company also derives revenue from management fees from Justice for actively managing the hotel as a general partner. As a general and limited partner, Portsmouth has significant control over the management and operation of the assets of Justice Investors. All significant partnership decisions require the active participation and approval of both general partners. The Company and Evon jointly consult and determine the amount of partnership reserves and the amount of cash to be distributed to the limited partners. Pursuant to the terms of the partnership agreement, voting rights of the partners are determined according to the partners' entitlement to share in the net profit and loss of the partnership. The Company is not entitled to any additional voting rights by virtue of its position as a general partner. The partnership agreement also provides that no portion of the partnership real property can be sold without the written consent of the general and limited partners entitled to more than 72% of the net profit. In May of 2004, a $5,000,000 settlement payment was made to Justice from the hotel lessee to resolve disputes regarding certain obligations of Felcor and others under the terms of the Hotel Lease. That settlement payment is being held in a separate partnership account and will be applied towards the costs of capital repairs, replacements and improvements necessary to place the hotel in the condition required by the Hotel Lease at the end of its term. The Partnership expects to utilize all of the settlement proceeds for such during fiscal 2005, which may impact the Company's equity in net income of Justice Investors for fiscal 2005. On December 10, 2004, Justice entered into a Franchise License Agreement for the right to operate the Hotel property as a Hilton brand hotel. Prior to operating the hotel as a Hilton, the Partnership is required to make substantial renovations to the hotel to meet Hilton standards in accordance with a product improvement plan agreed upon by Hilton and the Partnership, as -8- well as complying with other brand standards. The Partnership currently estimates that the cost of the renovations will range from approximately $27 million to $28 million with an additional $3 million required for construction interest and estimated carrying costs of operations during the transition period. The Agreement requires that those renovations be complete and the Hotel commence operations as a Hilton hotel no later than June 1, 2006. The term of the Agreement is for a period of 15 years commencing on the opening date, with an option to extend the license term for another five years, subject to certain conditions. On March 15, 2005, the Partnership announced its decision to close down its Hotel operations on or about June 1, 2005 to complete renovations of the Hotel as required by the Hilton Agreement. It is anticipated that the Hotel will be closed for a period of six to eight months before a contemplated reopening in the early part of 2006 as the "Hilton San Francisco Financial District". The below ground parking garage and Tru Spa located on the lobby level of the Hotel, both of which are lessees of the Partnership, will remain open during the renovation work. The Company amortizes the step up in the asset values allocable to the depreciable assets of its investment in Justice Investors over 40 years, which approximates the remaining life of the primary asset, the hotel building.Condensed financial statements for Justice Investors are as follows: JUSTICE INVESTORS CONDENSED BALANCE SHEET (Unaudited) As of March 31, 2005 ---------- Assets Cash $ 1,536,000 Other current assets 1,109,000 Property, plant and equipment, net of accumulated depreciation of $13,638,000 7,091,000 Construction in progress 4,023,000 Land 1,124,000 ---------- Total assets $14,883,000 ========== Liabilities and partners' capital Total current liabilities $ 3,087,000 Long-term debt 4,850,000 Other long-term liabilities 35,000 Partners' capital 6,911,000 ---------- Total liabilities and partners' capital $14,883,000 ========== -9- JUSTICE INVESTORS CONDENSED STATEMENTS OF OPERATIONS (Unaudited) For the three months ended March 31, 2005 2004 ---------- ---------- Hotel revenue $ 2,903,000 $ - Hotel rent - 625,000 Garage rent 245,000 296,000 Other income 60,000 42,000 Operating expenses (4,067,000) (615,000) ---------- ---------- Net income(loss) $ (859,000) $ 348,000 ========== ========== For the nine months ended March 31, 2005 2004 ---------- ---------- Hotel revenue $10,709,000 $ - Hotel rent - 1,875,000 Garage rent 794,000 970,000 Other income 189,000 435,000 Operating expenses (12,916,000) (1,801,000) ---------- ---------- Net income(loss) $(1,224,000) $ 1,479,000 ========== ========== 3. Investment in Marketable Securities ----------------------------------- The Company's investment portfolio consists primarily of corporate equities. The Company has also invested in income producing securities, which may include interests in real estate based companies and REITs, where financial benefit could inure to its shareholders through income and/or capital gain. At March 31, 2005, all of the Company's marketable securities are classified as trading securities. In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the change in the unrealized gains and losses on these investments are included earnings. Trading securities are summarized as follows: As of March 31, 2005: Gross Gross Net Market Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value ---------- ----------- --------------- --------------- --------------- ------------ Corporate Equities $ 6,393,000 $ 2,510,000 ($1,202,000) $1,308,000 $7,701,000
Of the gross unrealized loss of $1,202,000, $477,000 of the loss is related to securities held for over one year. As part of the investment strategies, the Company may assume short positions in marketable securities. Short sales are used by the Company to potentially offset normal market risks undertaken in the course of its investing activities -10- or to provide additional return opportunities. The Company has no naked short positions. As of March 31, 2005, the Company had obligations for securities sold (equities short) of $844,000. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading with net change in unrealized gains or losses included in earnings. Included in the net losses on marketable securities of $3,257,000 for the three months ended March 31, 2005 are net unrealized losses of $4,197,000 and net realized gains of $940,000. Included in the net gains on marketable securities of $1,438,000 for the three months ended March 31, 2004 are net unrealized losses of $946,000 and net realized gains of $2,384,000. Included in the net losses on marketable securities of $2,725,000 for the nine months ended March 31, 2005 are net unrealized losses of $2,976,000 and net realized gains of $251,000. Included in the net gains on marketable securities of $3,965,000 for the nine months ended March 31, 2004 are net unrealized gains of $320,000 and net realized gains of $3,645,000. 4. Rental Property --------------- The Company owns and operates a 27-unit multi-family apartment complex and a two-unit multi-family complex located in Los Angeles, California. Units are leased on a short-term basis with no lease extending beyond one year. At March 31, 2005, rental property included the following: Land $ 2,430,000 Buildings, improvements, and equipment 2,561,000 Accumulated depreciation on buildings, improvements, and equipment (359,000) ---------- $ 4,632,000 ========== 5. Segment Information ------------------- The Company operates in three reportable segments, the operations of its multi- family residential property, the operation of Justice Investors, and the investment of its cash and securities assets. These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment's performance. Management also makes operational and strategic decisions based on this same information. Information below represents reporting segments for the three and nine months ended March 31, 2005 and 2004. Operating income for rental properties consist of rental income. Operating income from Justice Investors consists of the operations of the hotel and garage, which are included in the equity in net income of Justice Investors. Operating income (loss) from investment transactions consist of net investment gains (losses) and dividend and interest income. -11- REAL ESTATE ------------------------- Three months ended Rental Justice Investment March 31, 2005 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income(loss) $ 113,000 $ (471,000) $(3,187,000) $ - $ (3,545,000) Operating expenses (34,000) - (195,000) - (229,000) ----------- ----------- ----------- ----------- ------------ 79,000 (471,000) (3,382,000) - (3,774,000) Mortgage interest expense (50,000) - - - (50,000) Depreciation (19,000) - - - (19,000) General and administrative Expense - - - (193,000) (193,000) Other income - - - 18,000 18,000 Income tax benefit - - - 1,607,000 1,607,000 Minority interest - - - 534,000 534,000 ----------- ----------- ----------- ----------- ------------ Net income (loss) $ 10,000 $ (471,000) $(3,382,000) $ 1,966,000 $ (1,877,000) =========== =========== =========== =========== ============ Total Assets $ 4,632,000 $ 7,309,000 $ 8,266,000 $ 1,915,000 $ 22,122,000 =========== =========== =========== =========== ============
REAL ESTATE ------------------------- Three months ended Rental Justice Investment March 31, 2004 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income $ 98,000 $ 152,000 $ 1,527,000 $ - $ 1,777,000 Operating expenses (52,000) - (403,000) - (455,000) ----------- ----------- ----------- ----------- ------------ 46,000 152,000 1,124,000 - 1,322,000 Mortgage interest Expense (52,000) - - - (52,000) Depreciation (18,000) - - - (18,000) General and administrative Expense - - - (216,000) (216,000) Other income - - - 16,000 16,000 Income tax expense - - - (421,000) (421,000) Minority interest - - - (106,000) (106,000) ----------- ----------- ----------- ----------- ------------ Net income (loss) $ (24,000) $ 152,000 $ 1,124,000 $ (727,000) $ 525,000 =========== =========== =========== =========== ============ Total Assets $ 4,679,000 $ 5,405,000 $27,503,000 $ 1,214,000 $ 38,801,000 =========== =========== =========== =========== ============
-12- REAL ESTATE ------------------------- Nine months ended Rental Justice Investment March 31, 2005 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income(loss) $ 326,000 $ (674,000) $(2,501,000) $ - $ (2,849,000) Operating expenses (114,000) - (462,000) - (576,000) ----------- ----------- ----------- ----------- ------------ 212,000 (674,000) (2,963,000) - (3,425,000) Mortgage interest Expense (151,000) - - - (151,000) Depreciation (59,000) - - - (59,000) General and administrative Expense - - - (650,000) (650,000) Other income - - - 112,000 112,000 Income tax benefit - - - 1,669,000 1,669,000 Minority interest - - - 564,000 564,000 ----------- ----------- ----------- ----------- ------------ Net income (loss) $ 2,000 $ (674,000) $(2,963,000) $ 1,695,000 $ (1,940,000) =========== =========== =========== =========== ============ Total Assets $ 4,632,000 $ 7,309,000 $ 8,266,000 $ 1,915,000 $ 22,122,000 =========== =========== =========== =========== ============
REAL ESTATE ------------------------- Nine months ended Rental Justice Investment March 31, 2004 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income $ 293,000 $ 672,000 $ 4,206,000 $ - $ 5,171,000 Operating expenses (149,000) - (873,000) - (1,022,000) ----------- ----------- ----------- ----------- ------------ 144,000 672,000 3,333,000 - 4,149,000 Mortgage interest Expense (152,000) - - - (152,000) Depreciation (55,000) - - - (55,000) General and administrative Expense - - - (670,000) (670,000) Other income - - - 43,000 43,000 Income tax expense - - - (1,326,000) (1,326,000) Minority interest - - - (437,000) (437,000) ----------- ----------- ----------- ----------- ------------ Net income (loss) $ (63,000) $ 672,000 $ 3,333,000 $(2,390,000) $ 1,552,000 =========== =========== =========== =========== ============ Total Assets $ 4,679,000 $ 5,405,000 $27,503,000 $ 1,214,000 $ 38,801,000 =========== =========== =========== =========== ============
6. Related Party Transactions -------------------------- Certain costs and expenses, primarily salaries, rent and insurance, are allocated among the Company and its subsidiary, Portsmouth, and the Company's parent, InterGroup, based on management's estimate of the utilization of resources. For the three and nine months ended March 31, 2005 and 2004, the Company and Portsmouth made payments to InterGroup of approximately $42,000 and $126,000 respectively, for each period, for administrative costs and reimbursement of direct and indirect costs associated with the management of the Companies and their investments, including the partnership asset. -13- John V. Winfield serves as Chief Executive Officer and Chairman of the Company, Portsmouth, and InterGroup. Depending on certain market conditions and various risk factors, the Chief Executive Officer, his family, Portsmouth and InterGroup may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and his family members, and the resources of Portsmouth and InterGroup, at risk in connection with investment decisions made on behalf of the Company. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND PROJECTIONS The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "estimate," "project," "anticipate" and similar expressions, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, such as the impact of terrorism and war on the national and international economies, including tourism and securities markets, general economic conditions and increased competition in the hotel industry in the San Francisco area, labor relations and labor disruptions, Partnership distributions, the ability of the Partnership to obtain hotel financing for renovations at favorable interest rates and terms, securities markets and concentration of risk, litigation and other factors, including natural disasters, and those discussed below in this section and in the Company's Form 10-KSB for the fiscal year ended June 30, 2004, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS The Company's 68.8% owned subsidiary, Portsmouth, has a 49.8% interest in the Justice Investors limited partnership ("Justice" or the "Partnership"). Justice owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California, commonly known as the Holiday Inn Select Downtown & Spa (the "Hotel"). Historically, Justice's most significant income source was a lease between the Partnership and Felcor Lodging Trust, Inc. ("Felcor") for the Hotel portion of the property. Pursuant to a Settlement Agreement entered into on May 3, 2004, Felcor agreed to terminate its lease and surrender possession of the Hotel to Justice, effective June 30, 2004. Effective July 1, 2004, Justice became the owner-operator of the Hotel, with the assistance of a Management Agreement with Dow Hotel Company, LLC. ("Dow") to perform the day-to day management functions of the Hotel. The Partnership also derives income from the lease of the garage portion of the property to Evon Garage Corporation ("Evon") and from a lease with Tru Spa for a portion of the lobby level of the Hotel. Portsmouth also receives management fees from Justice for actively managing the Hotel as a general partner. The Company also derives rental income from its multi-family real estate properties and income from the investment of its cash and securities assets. -14- On December 10, 2004, Justice entered into a Franchise License Agreement for the right to operate the Hotel property as a Hilton brand hotel. Prior to operating the hotel as a Hilton, the Partnership is required to make substantial renovations to the hotel to meet Hilton standards in accordance with a product improvement plan agreed upon by Hilton and the Partnership, as well as complying with other brand standards. The Partnership currently estimates that the cost of the renovations will range from approximately $27 million to $28 million with an additional $3 million required for construction interest and estimated carrying costs of operations during the transition period. The Agreement requires that those renovations be complete and the Hotel commence operations as a Hilton hotel no later than June 1, 2006. The term of the Agreement is for a period of 15 years commencing on the opening date, with an option to extend the license term for another five years, subject to certain conditions. RECENT DEVELOPMENTS On March 15, 2005, the Partnership announced its decision to close down its Hotel operations on or about June 1, 2005 to complete renovations of the Hotel as required by the Hilton Agreement. The Partnership made this decision based on a consideration of relative benefits and detriments of closing the Hotel during the renovation period. Among the many factors considered were the increased costs of construction while maintaining operations, the scope and timing of the work in the common areas and issues involved in attempting to maintain guest services during the renovations, engineering factors and potential environmental, health and safety issues which made it preferable to temporarily close the Hotel portion of the property. It is anticipated that the Hotel will be closed for a period of six to eight months before a contemplated reopening in the early part of 2006 as the "Hilton San Francisco Financial District". The below ground parking garage and Tru Spa located on the lobby level of the Hotel, both of which are lessees of the Partnership, will remain open during the renovation work. On March 15, 2005, the Partnership also entered into an amended lease with the Chinese Culture Foundation of San Francisco (the "Foundation") for the third floor space of the Hotel commonly known as the Chinese Cultural Center. The amended lease requires the Partnership to pay to the Foundation a monthly event space fee in the amount of $4,600, adjusted annually based on the local Consumer Price Index. The term of the amended lease remains the same as the current lease, expiring on October 17, 2023, with an automatic extension for another 10 year term if the property continues to be operated as a hotel. As discussed more fully in the "Financial Condition and Liquidity" section herein, the Partnership will be expending significant amounts of money to renovate and reposition the Hotel as Hilton. During that transition period, income from the Hotel will be limited and the Partnership is expected incur losses during that time. To meet its substantial financial commitments, the Partnership will have to rely on additional borrowings to meet its obligations. The Partnership currently estimates that the actual cost of the renovations will be approximately $27 million to $28 million with an additional $3 million required for construction interest and estimated carrying costs of operations. While the Partnership believes that the value of the Hotel property will be adequate to serve as collateral to secure the necessary financing, the Partnership does not anticipate paying any partnership distributions until some time after operations commence under the Hilton brand and net income and capital requirements warrant such distributions. As a result, the Company may have to depend more on the revenues generated from the investment of its cash and securities assets during that transition period. -15- Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 The Company had a net loss of $1,877,000 for the three months ended March 31, 2005 compared to net income of $525,000 for the three months ended March 31, 2004. As discussed below, the change was primarily due to the significant net losses on the Company's marketable securities portfolio and the change in the equity in net income(loss) of Justice Investors from income to a loss, partially offset the decrease in margin interest and trading expenses and the improvement in the Company's real estate operations. Rental income increased to $113,000 from $98,000 as the result of the reduced vacancies during the quarter ended March 31, 2005. Operating expenses also decreased to $34,000 from $52,000 as the result of management's efforts to reduce expenses. The improvement in the occupancy and reduction in operating expenses resulted in income of $10,000 from real estate operations in the current quarter as compared to a loss of $21,000 in the prior comparable quarter. The equity in net income(loss) of Justice Investors changed to a loss of $471,000 from income of $152,000. Effective July 1, 2004, Justice became the owner-operator of the Hotel rather than a lessor. Thus, the Partnership net income for the three months ended March 31, 2005 includes the direct operating results of the Hotel, whereas in the prior year Justice received rental income from Felcor pursuant to a lease. The net operating loss from the Hotel for the three months ended March 31, 2005 was approximately $744,000 while the Partnership received approximately $625,000 in rent from the Hotel lease for the three months ended March 31, 2004. The overall decrease in Partnership net income was primarily attributable to the net operating loss from the Hotel, a decrease in garage rent to $245,000 from $296,000 and increased costs in the current quarter related to professional fees and other costs for the repositioning of the Hotel Average daily room rates for the Hotel decreased to approximately $85 for the three months ended March 31, 2005, compared to approximately $91 for the three months ended March 31, 2004, while average occupancy rates remained relatively flat at approximately 60%. Those results primarily reflect the inability of the Hotel to currently meet its competition. The Hotel is facing more competition from new properties and from higher end properties that provide greater amenities to its guests, especially for the business traveler. The Partnership is committed to making the Hotel competitive in its market by undertaking a significant renovation of the property and entering into a new Franchise License Agreement to operate the Hotel as a Hilton Brand hotel after the renovation is complete. In addition, the hotel business in the San Francisco Bay Area has lagged behind the recovery seen in other major cities in the United States due to the continued weakness in the local economy and a decline in international travel. Net gains(losses) on marketable securities changed to net losses of $3,257,000 for the three months ended March 31, 2005 from net gains of $1,438,000 for the three months ended March 31, 2004. A significant portion of the losses in the current quarter was attributable to holdings in a company in the Pharmaceutical and Medical industry group whose stock significantly declined after one of its major drugs was unexpectedly pulled from the market. For the three months ended March 31, 2005, the Company had net unrealized losses of $4,197,000 and net realized gains of $940,000. For the three months ended March 31, 2004, the -16- Company had net unrealized losses of $946,000 and net realized gains of $2,384,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net income. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities please see the Marketable Securities section below. Margin interest and trading expenses decreased to $195,000 from $403,000 primarily due to a $261,000 performance-based compensation earned by the Company's CEO for his management of the Company's investment portfolio for the three months ended March 31, 2004. There was no such bonus earned by the Company's CEO for the three months ended March 31, 2005. Minority interest benefit(expense) changed to a benefit of $534,000 from an expense of $106,000 as the result of the significant loss incurred during the current quarter by the Company's subsidiary, Portsmouth. The provision for income tax benefit(expense) changed to a benefit of $1,607,000 from an expense of $421,000 as the result of the significant loss incurred during the current quarter. Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004 The Company had a net loss of $1,940,000 for the nine months ended March 31, 2005 compared to net income of $1,552,000 for the nine months ended March 31, 2004. As discussed below, the change was primarily due to the significant net losses on the Company's marketable securities portfolio and the change in the equity in net income(loss) of Justice Investors from income to a loss, partially offset the decrease in margin interest and trading expenses, the improvement in the Company's real estate operations, the increase in dividend and interest income and the increase in other income. Rental income increased to $326,000 from $293,000 as the result of reduced vacancies during the nine months ended March 31, 2005. Operating expenses also decreased to $114,000 from $149,000 as the result of management's efforts to reduce expenses. The improvement in the occupancy and reduction in operating expenses resulted in income of $2,000 from real estate operations for the nine months ended March 31, 2005 compared to a loss of $63,000 for the nine months ended March 31, 2004. The equity in net income(loss) of Justice Investors changed to a loss of $674,000 from income of $672,000. Effective July 1, 2004, Justice became the owner-operator of the Hotel rather than a lessor. Thus, the Partnership net income for the first nine months of fiscal 2005 includes the direct operating results of the Hotel, whereas in the prior year Justice received rental income from Felcor pursuant to a lease. The net operating loss from the Hotel for the nine months ended March 31, 2005 was approximately $929,000, while the Partnership received approximately $1,875,000 in rent from the Hotel lease for the nine months ended March 31, 2004. The overall decrease in Partnership net income was primarily attributable to the net operating loss from the Hotel, a decrease in garage rent to $794,000 from $970,000 and increased costs in related to professional fees and other costs for the repositioning of the Hotel. -17- Average daily room rates for the Hotel decreased to approximately $89 for the nine months ended March 31, 2005, compared to approximately $91 for the nine months ended March 31, 2004, while average monthly occupancy rates decreased to approximately 64.6% compared to approximately 68% in the prior year. Those results primarily reflect the inability of the Hotel to currently meet its competition. The Hotel is facing more competition from new properties and from higher end properties that provide greater amenities to its guests, especially for the business traveler. The Partnership is committed to making the Hotel competitive in its market by undertaking a significant renovation of the property and by entering into a new Franchise License Agreement to operate the Hotel as a Hilton Brand hotel after the renovation is complete. In addition, the hotel business in the San Francisco Bay Area has lagged behind the recovery seen in other major cities in the United States due to the continued weakness in the local economy and a decline in international travel. Net gains(losses) on marketable securities changed to net losses of $2,725,000 for the nine months ended March 31, 2005 from net gains of $3,965,000 for the nine months ended March 31, 2004. A significant portion of the losses was attributable to holdings in a company in the Pharmaceutical and Medical industry group whose stock significantly declined after one of its major drugs was unexpectedly pulled from the market. For the nine months ended March 31, 2005, the Company had net unrealized losses of $2,976,000 and net realized gains of $251,000. For the nine months ended March 31, 2004, the Company had net unrealized gains of $320,000 and net realized gains of $3,645,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net income. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities please see the Marketable Securities section below. During the nine months ended March 31, 2005, the Company's recorded an impairment loss of $84,000 related to a private placement investment. Dividend and interest income increased to $308,000 from $241,000 as a result of the increased investment in dividend yielding securities. Margin interest and trading expenses decreased to $462,000 from $873,000 primarily due to the decrease in the performance-based compensation earned by the Company's CEO for his management of the Company's investment portfolio to $61,000 for the nine months ended March 31, 2005 from $490,000 for the nine months ended March 31, 2004. Other income increased to $112,000 from $43,000 primarily due to the receipt of $69,000 in additional fees from Justice Investors for management's work in the positioning of the hotel. Minority interest benefit(expense) changed to a benefit of $564,000 from an expense of $437,000 as the result of the significant loss incurred during the nine months ended March 31, 2005 by the Company's subsidiary, Portsmouth. The provision for income tax benefit(expense) changed to a benefit of $1,669,000 from an expense $1,326,000 as the result of the significant loss incurred during the nine months ended March 31, 2005. -18- MARKETABLE SECURITIES The Company's investment portfolio is diversified with 33 different equity positions. Four equity securities are more than 5% of the equity value of the portfolio, with the largest being 17%. The amount of the Company's investment in any particular issuer may increase or decrease, and additions or deletions to its securities portfolio may occur, at any time. While it is the internal policy of the Company to limit its initial investment in any single equity to less than 5% of its total portfolio value, that investment could eventually exceed 5% as a result of equity appreciation or reduction of other positions. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. As of March 31, 2005, the Company had investments in marketable equity securities of $7,701,000. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups as of March 31, 2005. % of Total Investment Industry Group Market Value Securities -------------- ------------ ---------- Real estate investment trusts $ 2,294,000 29.8% Insurance, banks and brokers 2,042,000 26.5% Electric, pipelines, oil and gas 1,111,000 14.4% Apparel, food and consumer goods 917,000 11.9% Telecom and media 900,000 11.7% Pharmaceutical and medical 286,000 3.7% Other 151,000 2.0% ---------- ------ $ 7,701,000 100.0% ========== ====== As of March 31, 2005, the Company had approximately 29.8% of its marketable securities portfolio invested in the real estate investment trusts. While such concentration could be considered a risk factor, that industry grouping includes REITs that operate in different sectors of real estate industry, which the Company believes is consistent with its diversification policies. The following table shows the net gain or loss on the Company's marketable securities and the associated margin interest and trading expenses for the three and nine months ended March 31, 2005 and 2004, respectively. Three months ended Three months ended March 31, 2005 March 31, 2004 ------------------ ------------------ Net gains(losses) on marketable securities $ (3,257,000) $ 1,438,000 Dividend & interest income 70,000 89,000 Margin interest expense (104,000) (85,000) Trading and management expenses (91,000) (318,000) ------------ ------------ Investment income(loss) $ (3,382,000) $ 1,124,000 ============ ============ -19- Nine months ended Nine months ended March 31, 2005 March 31, 2004 ------------------ ------------------ Net gains(losses) on marketable securities $ (2,725,000) $ 3,965,000 Impairment loss on other invest. (84,000) - Dividend & interest income 308,000 241,000 Margin interest expense (225,000) (246,000) Trading and management expenses (237,000) (627,000) ------------ ------------ Investment income(loss) $ (2,963,000) $ 3,333,000 ============ ============ FINANCIAL CONDITION AND LIQUIDITY Historically, the Company's cash flows were primarily generated through its general and limited partnership interest in the Justice Investors limited partnership, which derived its income from its lease with Felcor and a lease with Evon. The Company also received monthly limited partnership distributions from Justice Investors as well as monthly management fees as a general partner. The Company also receives revenues generated from the investment of its cash and securities assets. As discussed below, since the Partnership will be expending significant amounts of money to renovate and reposition the Hotel as a Hilton, it will not be paying any monthly limited partnership distributions until some time after operations commence under the Hilton brand. As a result, the Company may have to depend more on the revenues generated from the investment of its cash and securities assets during that transition period. On May 3, 2004, Justice entered into a settlement agreement with the hotel lessee, Felcor, to resolve disputes regarding certain obligations of Felcor and others under the terms of the hotel lease. Pursuant to the settlement, Felcor paid the sum of $5,000,000 to Justice towards the costs of capital repairs, replacements and maintenance necessary to place the hotel into the condition required at the end of the lease. That one-time payment is expected to be fully utilized in fiscal 2005 for such costs, which may impact the Company's equity in net income of Justice Investors. Felcor also agreed to terminate its leasehold estate and surrendered possession of the hotel to the Partnership on June 30, 2004, at which time Justice assumed the role as owner-operator of the property. To assist in the day-to-day operations of the hotel, Justice entered into a third party management agreement with Dow Hotel Company, effective July 1, 2004. The termination of the hotel lease also made it possible for the Partnership to seek a new franchise agreement for the hotel. Those efforts were successful and culminated with Justice entering into a Franchise License Agreement, on December 10, 2004, for the right to operate the hotel property as a Hilton brand hotel. Prior to operating the hotel as a Hilton, the Partnership is required to make substantial renovations to the hotel to meet Hilton standards in accordance with a product improvement plan agreed upon by Hilton and the Partnership, as well as complying with other brand standards. The Partnership currently estimates that the cost of the renovations will be approximately $27 million to $28 million. The Agreement requires that those renovations be complete and the Hotel commence operations as a Hilton hotel no later than June 1, 2006. The term of the Agreement is for a period of 15 years commencing on the opening date, with an option to extend the license term for another five years, subject to certain conditions. -20- As discussed above, the Partnership has decided to close down its Hotel operations on or about June 1, 2005 to complete the renovations of the Hotel as required by the Hilton Agreement. It is anticipated that the Hotel will be closed for a period of six to eight months before a contemplated reopening as the "Hilton San Francisco Financial District" in the early part of 2006. The below ground parking garage and Tru Spa located on the lobby level of the Hotel, both of which are lessees of the Partnership, will remain open during the renovation work. During that transition period, income from the Hotel will be limited to rental income and the Partnership is expected incur losses during that time. In addition, the Hotel is currently negotiating severance benefits with its union employees related to the suspension of Hotel operations. Upon the reopening of the Hotel, the Partnership's income from operations could also be adversely impacted because of a potential labor disruption. Following the expiration on August 14, 2004 of the city-wide collective bargaining agreement with Local 2 of the Hotel Employees and Restaurant Employees Union, Local 2 has voted to authorize a strike against a group of some of the larger hotels in San Francisco and negotiations continue with those hotels during a "cooling-off period". If a strike or other labor actions are extended to the Hotel, its operations and renovation schedule could be disrupted. While it is expected that Partnership's hotel management company, Dow, will negotiate with the union to resolve any employee issues regarding the temporary shut down of Hotel and will implement contingency plans to minimize the impact on operations and the renovations should any union action be taken against the Hotel, no prediction can be made as to the impact of such an action on the operations of the Hotel and the financial results of the Partnership. To meet its substantial financial commitments, the Partnership will have to rely on additional borrowings to meet its obligations. The Partnership currently estimates that the actual cost of the renovations will be approximately $27 million to $28 million with an additional $3 million required for construction interest and estimated carrying costs of operations. The Partnership believes that the value of the Hotel property will be adequate to serve as collateral to secure the necessary financing. That amount of leverage and the associated debt service will create additional risk for the Partnership and its ability to generate cash flows in the future since the Hotel asset has been virtually debt free for many years. Due to the losses from the operations of the Hotel expected during the transition period, and the substantial financial commitments the Partnership will have to make for the renovations, Justice discontinued Partnership distributions effective April 2004. As a result, the Company received no Partnership distributions for the nine months ended March 31, 2005, while during the nine months ended March 31, 2004, the Company received Partnership distributions of $874,000. Justice does not anticipate paying any further Partnership distributions until some time after operations commence under the Hilton brand and net income and capital requirements warrant such distributions. As a result of the Partnership discontinuing its monthly distributions, the Board of Directors of Portsmouth deemed it necessary to discontinue the Company's regular semi-annual dividend of $.25 per common share. It is expected that the Company will not consider a return to a regular dividend policy until such time that Partnership cash flows and distributions warrant such consideration. -21- As the Partnership transitions from a lessor of the hotel to an owner-operator, cash flows will be dependent on net income from the operations of the hotel and not from a lease with a guaranteed rent. That uncertainty, coupled with the additional debt load for the hotel renovation, increases the amount of risk for the Company, but also provides an opportunity for a greater share of the profits in good economic times with the repositioning of the hotel. Although the Partnership is not expected to see a significant improvement in cash flows until sometime in 2006, it believes that the renovations to the Hotel, the new management structure and a new brand will make the Hotel more competitive in the future. There might also be some negative impact on the revenues of the hotel garage during the transition period. At this time, the Partnership does not anticipate that impact will be material. The recovery of tourism, the hotel industry and general economy in the San Francisco Bay Area continues to lag behind that of many cities. The increase in competition has also added additional challenges to an already difficult business environment. The Partnership anticipates that it will be able to finance the necessary improvements to reposition the Hotel and to meet any operating cash flow needs during the transition period from the proceeds of the settlement with Felcor and through additional borrowings. Justice believes that it can service that additional debt during the transition period primarily from the rentals it receives from the Hotel garage and from an interest reserve that will be established from its borrowings. If the Partnership is unable to obtain sufficient financing, or financing at favorable interest rates, it may have to consider other alternatives such as additional capital contributions. The Partnership considers the necessity for such alternatives as unlikely at this time. During January 2004, the Partnership refinanced its existing line of credit by obtaining a new facility that provides for a line of credit of up to $7,500,000. The facility is collateralized by a first deed of trust on the Partnership property and matures on February 1, 2006. Interest only is payable monthly at an annual rate equal to the 30-Day LIBOR rate plus 2%. There are no prepayment penalties. As of March 31, 2005, the outstanding principal balance on the Partnership's line of credit was $4,850,000. The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company's marketable securities are classified as trading with unrealized gains and losses recorded through the statement of operations. Although the Company has suffered a significant decline in hotel revenues and may be facing a significant period of time without partnership distributions, management believes that its cash, securities assets, and the cash flows generated from those assets, will be adequate to meet the Company's current and future obligations. The Company also does not have any material contractual obligations or commercial commitments. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off balance sheet arrangements. -22- IMPACT OF INFLATION Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. To the extent that Dow is able to adjust room rates, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material. The impact of inflation on the Company's multifamily real estate is also not viewed by management as material as tenant leases are short-term and expire within twelve months. CRITICAL ACCOUNTING POLICIES The Company reviews its long-lived assets and other investments for impairment when circumstances indicate that a potential loss in carrying value may have occurred. For the Company's investment in Justice, to the extent that projected future undiscounted cash flows from the operation of the Company's hotel property are less than the carrying value of the asset, the carrying value of the asset is reduced to its fair value. For other investments, the Company reviews the investment's operating results, financial position and other relevant factors to determine whether the estimated fair value of the asset is less than the carrying value of the asset. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading with net unrealized gains or losses included in earnings. Item 3. Controls and Procedures (a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Quarterly Report on Form 10-QSB. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations. (b) Internal Control Over Financial Reporting. There have been no changes in the Company's internal control over financial reporting during the last quarterly period covered by this Quarterly Report on Form 10-QSB that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -23- PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Shareholders. The Annual Meeting of the Shareholders of the Company was held on February 24, 2005 at the Luxe Summit Hotel Bel-Air, 11461 Sunset Blvd., Los Angeles, California 90049. At that meeting, all of management's nominees: John V. Winfield, John C. Love and William J. Nance, were elected as Directors of the Company to serve until the next Annual Meeting, with each nominee receiving in excess of 99% of the shares voted. At that Meeting, the shareholders also voted in favor of the ratification of the Audit Committee's selection of PricewaterhouseCoopers LLP as the independent auditors of the Company for the fiscal year ending June 30, 2005. A tabulation of the vote follows: Proposal (1) - Directors: Votes For Withheld --------- -------- John V. Winfield 1,056,801 7,005 John C. Love 1,057,201 6,605 William J. Nance 1,057,201 6,605 Proposal (2) - Accountants: Votes For Against Abstained --------- ------- --------- PricewaterhouseCoopers LLP 1,062,648 400 758 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a). 31.2 Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. (b) Registrant filed the following report on Form 8-K during the quarter covered by this Report: Date of Report Item Number Events Reported ----------------- ------------ ------------------------------------- March 15, 2005 Item 8.01 Justice Investors decision to close Other Events Hotel for renovations and amendment to lease of Chinese Culture Center. -24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SANTA FE FINANCIAL CORPORATION (Registrant) Date: May 12, 2005 by /s/ John V. Winfield --------------------------- John V. Winfield, President, Chairman of the Board and Chief Executive Officer Date: May 12, 2005 by /s/ Michael G. Zybala --------------------------- Michael G. Zybala, Vice President, and Secretary Date: May 12, 2005 by /s/ David T. Nguyen -------------------------- David T. Nguyen, Treasurer and Controller (Principal Accounting Officer) -25-